Speaker 1: Bloomberg Audio Studios, podcasts, radio news Tracy, Are we still
Speaker 1: doing this? It seems like it Actually what is this
Speaker 1: supposed to be? Is this a Cold war bunker or
Speaker 1: something like that.
Speaker 2: That's a good question. Maybe it's a vault or the
Speaker 2: vienna sewage system like in the Third Band. Do you
Speaker 2: remember that that was a good movie?
Speaker 1: I should see that, Okay, But in this episode we've
Speaker 1: moved on from the immediate post war period. We are
Speaker 1: now in the nineteen sixties, a turbulent time for society
Speaker 1: and politics, but also for euro dollars, which are the
Speaker 1: subject of our special series.
Speaker 3: Yep.
Speaker 2: This is the second installment of our three part history
Speaker 2: of euro dollars. If you haven't listened to our first episode,
Speaker 2: you should definitely go back and find it. We have
Speaker 2: been tracing the origins of this very particular and special
Speaker 2: form of money to better understand how it came to
Speaker 2: be and what it actually does. And our first episode
Speaker 2: looked at the creation of euro dollars and they're perhaps
Speaker 2: unexpected communist connections.
Speaker 1: Yep, that's right. And now we're going to turn the
Speaker 1: page new decade, a new chapter in euro dollar's existence.
Speaker 2: There's something else new that happens right around this time.
Speaker 2: So dollar swap lines get created. Do you remember those, Joe.
Speaker 1: I've read about them in that Adam Two's book crashed,
Speaker 1: But yes, they were big in two thousand and eight,
Speaker 1: then again in twenty twenty, also the Eurozone crisis. They're
Speaker 1: basically something that no one ever talks or thinks about
Speaker 1: outside of a crisis.
Speaker 2: Yeah, I think that's right. So they are dollar borrowing
Speaker 2: lines for other central banks. And I've seen swap lines
Speaker 2: described as the international lender of last resort. They tend to,
Speaker 2: as you mentioned, get tapped during big emergencies. That's when
Speaker 2: we hear about them. But swap lines basically allow central
Speaker 2: banks to exchange currencies, and in this case it is
Speaker 2: all about getting dollars.
Speaker 1: And as a reminder, our storytellers for these episodes are
Speaker 1: lovemanand and Josh Younger.
Speaker 3: I'm levmanand I'm a law professor at Columbia Law School,
Speaker 3: where I study money and banking and the history of
Speaker 3: central banking.
Speaker 4: I'm Josh Younger. I'm a policy advisor at the Federal
Speaker 4: Reserve Bank of New York and the views I am
Speaker 4: going to express are my own and not necessarily those
Speaker 4: of the Federal Reserve Bank of New York or the
Speaker 4: Federal Reserve system.
Speaker 2: When we left off, we were at the end of
Speaker 2: the nineteen fifties, the euro dollar market was just a
Speaker 2: billion dollars or so. But it's grown from pretty much nothing,
Speaker 2: and so it's starting to attract more attention from policymakers
Speaker 2: at central banks. And now as we enter the nineteen sixties,
Speaker 2: euro dollars are even going to hit mainstream politics.
Speaker 1: Let's take a listen.
Speaker 4: So now it's the fall of nineteen sixty, Kenny's run
Speaker 4: for president, a very tight race against Vice President Richard Nixon,
Speaker 4: and in the background, the monetary system is in crisis
Speaker 4: and it's really showing signs not just to fatigue, but
Speaker 4: of potential collapse. And so to understand why that could happen, like,
Speaker 4: what does that even mean, especially in the context of
Speaker 4: the nineteen sixties, we kind of have to go back
Speaker 4: to the war. So it's nineteen forty four now, and
Speaker 4: forty four countries are convening in Bretton Woods, New Hampshire.
Speaker 4: Small town, big hotel. They took up most of it.
Speaker 4: It's about seven hundred people. And the whole premise of
Speaker 4: this is to find a way to restructure the global
Speaker 4: economic and monetary system after the war's officer. It's still
Speaker 4: a presumptuous right, the wars not ever yet, but they're
Speaker 4: still planning ahead. And so you know, we hear a
Speaker 4: lot about Yelton, Potsdam and the big conferences about the
Speaker 4: partition of Europe and Berlin and so forth, But this
Speaker 4: is really among the most important of these postwar planning conferences.
Speaker 4: It's the brainchild of Harry Dexter White, who most people
Speaker 4: haven't heard of as well. He's been the Treasury since
Speaker 4: the mid thirties. He's a PhD economist, doesn't really like
Speaker 4: what ends up for teaching, and Milton Friedman's professor recruits
Speaker 4: him to go to the Treasury to work from Morgan
Speaker 4: thou who's FDRs very long serving Treasury Secretary. I think
Speaker 4: he's the second longest serving after Gallaton, who is Jefferson's secretary.
Speaker 4: So he has the job for like twelve years, which
Speaker 4: is a long time to be a Treasury secretary. And
Speaker 4: there's really two competing visions going into this conference. The
Speaker 4: first is the American vision, which is a dollar based
Speaker 4: global monetary order in which gold forms the foundation. So
Speaker 4: your dollars are convertible into gold. All and currencies, at
Speaker 4: least among the victors are fixed in their exchange rates,
Speaker 4: so pegged to the dollar, and so everything kind of
Speaker 4: revolves around the US dollar and the gold stock that
Speaker 4: the US has accumulated over the course of the war.
Speaker 4: The US is two thirds of global gold reserves at
Speaker 4: this point, so it's monetary gold reserve. So they have
Speaker 4: a lot of let's say, leverage going into this conference,
Speaker 4: and they know it. And that's been a dream of
Speaker 4: White since basically joined the Treasury. He's been pushing for
Speaker 4: a global dollar system. He really wants the dollar to
Speaker 4: retake its prior position. Remember in the twenties, the dollar
Speaker 4: was the global reserve currency, was the currency of trade.
Speaker 4: It lost that status over the thirties on a series
Speaker 4: of runs on the dollars. So he's very familiar with
Speaker 4: what happens when this breaks down, and he wants to
Speaker 4: bring the dollar back. This is the second bite at
Speaker 4: the apple, and so he wants the dollar to be
Speaker 4: part of global trade. He wants to be the unit
Speaker 4: of account. He actually wants all the invaded territories to
Speaker 4: use the dollar. So he wants invasion currency to be
Speaker 4: printed by the Treasury they called yellow seal dollars, So
Speaker 4: he wants dollars everywhere in cleaning North Africa, Germany, et cetera,
Speaker 4: and actually do that in some places. And the British,
Speaker 4: on the other hand, are very aware of this, in
Speaker 4: large part because they don't have any gold and so
Speaker 4: they have no leverage. But they're worried that the US
Speaker 4: will come out of this conference with way too much
Speaker 4: global power, especially relative to the European allies, and John
Speaker 4: Mayner Kain's is their champion. He comes up with an
Speaker 4: alternative arrange because a bank ORP, which is a contraction
Speaker 4: of bunkin or in French. I promised earlier I wouldn't
Speaker 4: do French words, so I apologized with the accent, but
Speaker 4: you know it's bank gold. Which is the idea is
Speaker 4: there is no global currency issued by one country. There's
Speaker 4: only a transnational credit organization kind of like a bank,
Speaker 4: where international trade happens on the books of that organization.
Speaker 4: So it's something like a transnational central bank, and it
Speaker 4: involves everyone giving up their sovereignty to some extent to
Speaker 4: facilitate global trade in what he considered sort of a
Speaker 4: fair and less arbitrary way. Meanwhile, White is very aware
Speaker 4: of the potential sacrifice of sovereignty to use the dollars
Speaker 4: of global reserve currency in the global unit of trade.
Speaker 4: It's just he would prefer everyone else to sacrifice their
Speaker 4: sovereignty rather than the US, and so in the end,
Speaker 4: basically the US wins, and they win because Lionel Robbins
Speaker 4: is one of the UK delegation. This is in Ben
Speaker 4: Steele's book. He basically says, we needed the cash right,
Speaker 4: so they don't have a lot of leverage. This is
Speaker 4: a power grab by the US.
Speaker 3: The US is by far the biggest economy in the world,
Speaker 3: it has the prevailing military in the world, and there's
Speaker 3: an opportunity here for real internationalism and cooperation around global
Speaker 3: trade and the monetary system that facilitates it, and the
Speaker 3: US rejects that and essentially imposes an alternative system that
Speaker 3: puts the US much more in the driver's seat and
Speaker 3: everybody else in a more subordinate position.
Speaker 4: It's also there's a lot of very human elgiment this,
Speaker 4: Like by the end of the Brettonwoods conference it's three
Speaker 4: weeks long. No one thought it would go that long.
Speaker 4: They're tired they're hungover. They went through a lot of
Speaker 4: liquor at this conference. There's no food left at the hotel,
Speaker 4: and so like everyone just kind of wants to go home. Now,
Speaker 4: that's not a great reason to sign the world over
Speaker 4: to the US as a dollar centric universe, but there
Speaker 4: really is like a human elements how all of this
Speaker 4: goes down. That's kind of one of the themes through
Speaker 4: this whole story.
Speaker 3: And multilateralism is hard, and there are a lot of
Speaker 3: frictions to get countries to cooperate on really really high
Speaker 3: stakes issues for their domestic economies. And we'll see in
Speaker 3: the course of this story how cooperation often breaks down
Speaker 3: and shortcuts prevail over longer term, higher cost solutions to problems.
Speaker 4: So the Brentwood system is one in which for thirty
Speaker 4: five dollars you can have an ounce of gold from
Speaker 4: the treasury and specifically foreign central banks. You have to
Speaker 4: be an official institution that you know, I couldn't get
Speaker 4: thirty five dollars for gold, but the Bunk de France could.
Speaker 4: And so the US isn't a sense of the world's
Speaker 4: banker because they're issuing dollars and they can in principle
Speaker 4: issue more dollars than they have gold. So it's not
Speaker 4: a fully reserved system. There's leverage embedded in the international system,
Speaker 4: and so that happens pretty quickly because global trade expands
Speaker 4: and the US monetary gold stock is not increasing. Actually
Speaker 4: most of the gold production is in Russia, so they're
Speaker 4: not giving it over so easy, and so over time
Speaker 4: the world needs more and more dollars and the value
Speaker 4: of those dollars implicitly starts to decline. Now, what does
Speaker 4: that mean in the context of a peg from the treasury.
Speaker 4: If the treasure will always buy your dollars for renounce
Speaker 4: of gold for thirty five dollars, what does it mean
Speaker 4: for the value the dollar to go down? Well, that's
Speaker 4: not the only gold market in town, and soon on
Speaker 4: the continent, and in London at the Metal exchange, it
Speaker 4: costs a little more than thirty five dollars to buy
Speaker 4: an ounce of gold, and that's really consequences of non
Speaker 4: monetary demand. So you have some speculators. A huge fraction
Speaker 4: of gold in the world is held up in jewelry
Speaker 4: like that's the real thing. So you know, there's reasons
Speaker 4: you would want gold other than to back your currency.
Speaker 4: I think it's fair to say, and there are more
Speaker 4: and more of those reasons and more and more demand
Speaker 4: for those purposes over time. And so this introduces a
Speaker 4: fundamental instability into the breton Wood system, because if a
Speaker 4: foreign central bank is exporting to the US, the US
Speaker 4: is running a balance of payments deficit. That means they're
Speaker 4: importing more than they are exporting. Dollars are piling up
Speaker 4: in Europe. Those dollars can in principle be exchanged for
Speaker 4: gold at thirty five dollars an ounce. That gold can
Speaker 4: be sold for thirty five dollars and fifteen cents an
Speaker 4: ounce in London, and sometimes much more than that. And
Speaker 4: so slowly at first, then all at once, so to speak,
Speaker 4: the US gold stock starts to decline at the same
Speaker 4: time as their dollar liabilities are going up. So now
Speaker 4: you owe more gold in principle to more people, but
Speaker 4: you have less of it with which to pay them.
Speaker 4: That's a bank run, or at least a slow motion
Speaker 4: bank run, and so people get really worried that this
Speaker 4: is going to just accelerate, and they need some way
Speaker 4: essentially the staunch of the bleeding. So you know, you
Speaker 4: have a couple of options, and I should say this
Speaker 4: becomes an election issue in Kennedy Nixon. I mean it
Speaker 4: comes up in the third debate. There's a big shock
Speaker 4: to the price of gold in October of nineteen sixty,
Speaker 4: where the price goes to forty dollars ounce, which is
Speaker 4: kind of insane if you can buy it from the
Speaker 4: treasury at thirty five. It kind of sticks there for
Speaker 4: a little while, and so Nixon is out there saying, well,
Speaker 4: Kennedy's going to blow up the dollar.
Speaker 5: Mister Vice President.
Speaker 6: In the past three years, there has been an exodus
Speaker 6: of more than four billion dollars of gold from the
Speaker 6: United States, apparently for two reasons, because exports have slumped
Speaker 6: and having covered imports, and because of increased American investments abroad.
Speaker 6: If you were a president, how would you go about
Speaker 6: stopping this departure of gold from our shores? All, mister
Speaker 6: Vrongfrand the first thing we have to do is to
Speaker 6: continue to keep confidence abroad in the American dollar. That
Speaker 6: means that we must continue to have a balanced budget
Speaker 6: here at home in every possible circumstance that we can,
Speaker 6: because the moment that we have loss of confidence in
Speaker 6: our own physical policies at home, it results in gold
Speaker 6: glowing up.
Speaker 4: And he initially kind of brushes it off. He says, oh,
Speaker 4: I guess sick Nickson thinks I can trade gold in London,
Speaker 4: Like that's hilarious. And eventually this advice is like, you
Speaker 4: have to actually address this. People are really worried that
Speaker 4: your policies are going to lead to a collapse of
Speaker 4: the dollar. And so he puts out a formal statement
Speaker 4: as a candidate pledging his support for the dollar. So
Speaker 4: this is really becoming an issue of national security, Like
Speaker 4: people associate the dollar with the core of NATO in
Speaker 4: the free world, and Eisenhower is pretty explicit on this point.
Speaker 4: Kennedy's pretty explicit on this point. I mean, the collapse
Speaker 4: of the dollar is like not an acceptable outcome because
Speaker 4: it really reflects a collapse of the anti communist alliance
Speaker 4: that's developed in the past ten years. So it's kind
Speaker 4: of core to the US's sense of itself that the
Speaker 4: world remain on a dollar standard, that the dollar remains strong.
Speaker 3: Part of what's gone wrong here is Harry Dexter White,
Speaker 3: in crafting this new system that puts the dollar at
Speaker 3: the center, has given something up to everybody else, and
Speaker 3: that's the peg of the dollar to gold at thirty
Speaker 3: five dollars announced and the power that is given up
Speaker 3: by the US to all those foreign central banks to
Speaker 3: allow them to withdraw gold at that exchange rate. And
Speaker 3: at the time that this is done, the US has
Speaker 3: so much gold stock. But what has happened is we
Speaker 3: have recreated nineteenth century conditions by essentially bringing back a
Speaker 3: gold standard and the rigidity that goes with it and
Speaker 3: the run ability on the currency that goes with it.
Speaker 3: We're not used to the idea of running on the
Speaker 3: currency in the United States today, but that was a
Speaker 3: problem that countries experienced a lot when they had convertibility
Speaker 3: to gold. And so we're in the post war world
Speaker 3: here and we have brought back convertibility to gold, all
Speaker 3: the risks that go with it, and the rigidity that
Speaker 3: goes with it because we no longer have the ability
Speaker 3: to control the elasticity of the money. So apply there's
Speaker 3: this sort of bomb built into the system where if
Speaker 3: everybody decides to redeem all at once, the money supply
Speaker 3: is going to start contracting rapidly. They're going to have
Speaker 3: a crisis of confidence. And so here we are in
Speaker 3: nineteen sixty in some sense at the apex of US power,
Speaker 3: confronting the possibility that we could be in nineteen thirty
Speaker 3: two all over again with a series of withdrawals and
Speaker 3: the US dollar breaking the peg, and that comes to
Speaker 3: take on this great significance the idea that we won't
Speaker 3: be able to maintain the peg. Of course, from an
Speaker 3: optimal design perspective, you really want to be able to
Speaker 3: adjust that peg. But you've said it's going to be
Speaker 3: thirty five dollars. And now suddenly, in the Cold War world,
Speaker 3: in global politics and even in domestic politics, this idea
Speaker 3: of the dollar maintaining its value takes on this grit
Speaker 3: sense of significance, and increasingly US policy makers are in
Speaker 3: a bye.
Speaker 4: So in a speech to the IMF in September of
Speaker 4: nineteen sixty two, Kennedy is very clear on this point
Speaker 4: that the dollar, the importance of the dollar in the
Speaker 4: fight against communism, is critical to his administration.
Speaker 7: The security of the dollar, therefore, he is, and ought
Speaker 7: to be of major concern to every nation here. To
Speaker 7: undermine the strength of the dollar would undermine the strength
Speaker 7: of the free world. We are taking every prudent step
Speaker 7: to maintain the strength of the dollar to improve our
Speaker 7: balance of payments and to back up the dollar by
Speaker 7: expanding the growth of our economy. We are pledged to
Speaker 7: keep the dollar fully convertible in a goal and to
Speaker 7: back that pledge with all our resources of gold and credit.
Speaker 4: This is the thing. You can fix the problem one
Speaker 4: of two ways. You can change the peg slash change
Speaker 4: the system, or you can find ways to reinforce it
Speaker 4: through sort of makeshift measures. These are the shortcuts, right,
Speaker 4: And so you know Kennedy thinks this issue is public
Speaker 4: enemy number two. Number one is nuclear war. Number two
Speaker 4: is the stability of the dollar. He actually tells Ours
Speaker 4: Lessenger this of the course of the campaign and then
Speaker 4: into his early presidency, and so questions how do you
Speaker 4: do it? So among those two options, he commissions a
Speaker 4: test force. He's elected. He turns to Adelai Stephen Center,
Speaker 4: and he says, what do I need to focus on?
Speaker 4: And Stevenson says, definitely the dollar. In fact, this whole
Speaker 4: system isn't working, so we probably want to think about
Speaker 4: a new one. And Kennedy doesn't like that answer. Because
Speaker 4: Kennedy is sensitive to a lot of different things. One
Speaker 4: is he's portrayed his young and inexperience. There's actually memos
Speaker 4: in the campaign about how to deal with the youth
Speaker 4: and inexperienced issue, and so he's very sensitive to any
Speaker 4: sense that he's not up to the job. And he
Speaker 4: tells his advisors, if this thing falls apart's gonna be on me, right,
Speaker 4: And so he doesn't like that. Generically, he's also like
Speaker 4: fundamentally an institutionalist. He doesn't love the idea of dramatic change.
Speaker 4: He doesn't like taking those risks, and so he basically
Speaker 4: doesn't like what Stevenson and George Ball have to say.
Speaker 4: So he says, I want a new report. So he
Speaker 4: gets Alan Sprule, who's the outgoing I think he'd left
Speaker 4: a couple of years earlier president of the New York Fed,
Speaker 4: to write a different report. And that new report says,
Speaker 4: don't mess with it. It's probably fine, it's not a crisis.
Speaker 4: The public's impressions are wrong, but you need to address
Speaker 4: this forcefully, but you know, don't do anything drastic, and
Speaker 4: so he basically takes that to heart. Implicitly, the question
Speaker 4: is who's going to execute on this.
Speaker 3: And you think about this from the perspective of Kennedy,
Speaker 3: who's just been put into this very difficult job. And
Speaker 3: his advisors come to him and say, actually, we have
Speaker 3: an international monetary system with a basic flaw in it,
Speaker 3: which is the dollars pegged a gold at thirty five
Speaker 3: dollars announce and it's ultimately going to have to break
Speaker 3: that peg. This system doesn't work. We should do something else.
Speaker 3: You're like, is there some way to keep the thing going?
Speaker 3: And that's what leads the second report, and that's what
Speaker 3: leads to the growth of the euro dollar market, because
Speaker 3: it turns out that the way to keep the thing
Speaker 3: going is to develop this offshore dollar alternative.
Speaker 4: So now we can meet some actual characters in this story.
Speaker 4: So there's the Treasury team that comes in with Kennedy
Speaker 4: is head by at least with respect to this issue.
Speaker 4: Is two people in particular. One's Douglas Dylon of Dylan Reid.
Speaker 4: His father founded Dylan Reid. He's one of the wealthiest
Speaker 4: people in the United States, the former ambassador to France,
Speaker 4: and he was selected in part because he owned a
Speaker 4: vineyard Oprion actually, so a very well known vineyard in Bordeaux,
Speaker 4: so he had French roots sort of and does a
Speaker 4: good job. He's put at State. He's a contender for
Speaker 4: Secretary of State when Dulles leaves, he ultimately doesn't get
Speaker 4: the job, but Kennedy wants to put some own at
Speaker 4: Treasury who has a good business reputation, who is well respected,
Speaker 4: has government experience, and people generally like this guy. He's
Speaker 4: like seen as one of those consummate bureaucrats who's like
Speaker 4: sharp and thoughtful and a good listener and clear in
Speaker 4: all of these things, and so he brings with him Bob.
Speaker 4: Bob russis from the New York FED. He actually served
Speaker 4: in the Second Worl War under Charlie Kindelberger. Charlie Kinderburger
Speaker 4: is the father in some sense of the idea of
Speaker 4: the dollar as a key currency, or at least a
Speaker 4: big proponent of it. But they were doing strategic bombing
Speaker 4: targets together. Kinderberger was his commanding officer, so he had
Speaker 4: some connections to this idea through his wartime experience of
Speaker 4: a global dollar system. And their bias, both of them
Speaker 4: is to reinforce the existing system. They kind of want
Speaker 4: to find a way to save the Bretonwoods arrangement. So
Speaker 4: here's Bob russa looking back from a few years later.
Speaker 8: We got them to recognize after the big flurry at
Speaker 8: camera had October twentieth, nineteen sixty four, when the market went.
Speaker 9: Up to a forty dollars price.
Speaker 8: That time that was looked at it was quite a
Speaker 8: threat to the stability as a monetary gold price and
Speaker 8: got them alarmed. And so after that, when it was clear,
Speaker 8: particularly by the time President Kennedy came in and made
Speaker 8: it firm that we were going to continue to support
Speaker 8: thirty five dollars price, and then the London price began
Speaker 8: coming down, it was fairly easy to persuade these other
Speaker 8: countries that you know, we ought to be together in
Speaker 8: this because as gold comes back.
Speaker 9: Into the market.
Speaker 8: Now we the United States don't want to have to
Speaker 8: just have it appear that we're always taking all the
Speaker 8: gold out.
Speaker 9: Putting it in sometimes two.
Speaker 8: Of course, but why don't we share this as a
Speaker 8: buying pool when it comes into the market at thirty
Speaker 8: five Then we won't be in there bidding against each other.
Speaker 8: It will be an orderly arrangement, would be a little
Speaker 8: bit of like a cartel, but in the interests of
Speaker 8: the world monetary system.
Speaker 4: On the other side, you have Walter Heller. Walter Heller
Speaker 4: is the chair of the Council of Economic Advisors. Kenny's
Speaker 4: trying to balance out Dylan's like somewhat conservative eisenhowerd administration
Speaker 4: reputation with someone who's much more on the New Deal
Speaker 4: liberal side of things, and The New York Times calls
Speaker 4: him a prototype of the liberal economists. He's very well
Speaker 4: known for his tax policy views, and he often talks
Speaker 4: in terms of human flourishing, Right, we should adjust the
Speaker 4: tax god to promote human flourishing. And he brings with
Speaker 4: him Jim Tobin, who is a very well respected economist.
Speaker 4: He won the James Big Clark Medal, which is kind
Speaker 4: of like a Nobel prize ish thing in fifty five,
Speaker 4: so he's very very well established, and he comes in
Speaker 4: as one of the economists on the council, and in
Speaker 4: particular the one task with international issues. And so they
Speaker 4: think this whole thing is flawed from the start, and
Speaker 4: they're pushed to the President elect, and eventually the president
Speaker 4: is to do something brand new and think about all
Speaker 4: kinds of different arrangements. Heller sends out, it's han of memos,
Speaker 4: that kind of list. He says he does it with Russa,
Speaker 4: but it's clear, like who's who in this and it
Speaker 4: turns into a pretty contentious argument. I mean, there's actually
Speaker 4: in the Kennedy Library archives, they have little political cartoons
Speaker 4: the Deputy National Security Advisor Drew making fun of Bob
Speaker 4: Russa and like all this stuff he's trying to do
Speaker 4: at the same time, and in some of these memos
Speaker 4: that kind of derogatory, like no one really believes what
Speaker 4: this guy is writing. So there's a lot of tension
Speaker 4: between the Treasury and the White House.
Speaker 3: Kennedy appoints Dylan, who is a prominent member of the
Speaker 3: opposing political party. So here we have this new democratic
Speaker 3: administration coming in and one of the most important cabinet
Speaker 3: posts goes to a very wealthy Wall Street scion from
Speaker 3: the other political party. And so the battle within the
Speaker 3: administration is also for the future of financial policy in
Speaker 3: the Democratic Party, where you have the New Deal liberals
Speaker 3: the FDR crew fighting this basically interloper. Who's Dylan losing
Speaker 3: Because time and again, as Kennedy himself notes, Dylan thwarts
Speaker 3: the new deoliberal economists in the administration, and Dylan is
Speaker 3: the one who ultimately crafts the policy of the administration
Speaker 3: and the policy that comes to dominate Democratic administrations that
Speaker 3: succeed Kennedy as well. And so this is a very
Speaker 3: important turning point in how the executive branch in democratic
Speaker 3: administrations approaches financial policy. And it's no longer the FDR
Speaker 3: vision that is in the driver's seat.
Speaker 4: And ultimately, every time they're pitted against each other, the
Speaker 4: treasure basically wins those arguments because the Treasury's advocating stability
Speaker 4: and the CEA the Council of Economic Advisors, is advocating upheaval.
Speaker 4: Now maybe productive upheople but something very dramatic, and so
Speaker 4: Kennedy really is predisposed to go with the upheaval side
Speaker 4: of things, and they keep it up. Ultimately, he wants
Speaker 4: to reinforce the existing system. So the question is how
Speaker 4: do they do that. How do euro dollars come in?
Speaker 4: So the first thing they do is they try to
Speaker 4: figure out what year dollars can do for them. And
Speaker 4: the key here is to keep a global dollar system,
Speaker 4: but to have it all offshore because one of the
Speaker 4: big problems with the balance of payments is that Americans
Speaker 4: are investing overseas, which means pushing dollars out of the
Speaker 4: US and taking in financial assets. So the dollars are leaving,
Speaker 4: financial assets are coming in, and that's a big source
Speaker 4: of the flood of dollars into Europe and the risk
Speaker 4: that those dollars will then be turned into gold. And
Speaker 4: so you basically want to push all of that activity.
Speaker 4: All those foreign corporations that want to borrow dollars, don't
Speaker 4: borrow them in New York, borrow them in London. And
Speaker 4: there's two ways to do that. One is you can
Speaker 4: provide incentives to push that activity off shore. They do
Speaker 4: that using the tax code. And the second is to
Speaker 4: make the euro banks, the year dollar issuing banks, more
Speaker 4: attractive to potential investors they can row their business. Because
Speaker 4: if you want to take US financial activity push it
Speaker 4: off shore, you need to make sure the euro dollar
Speaker 4: system can accept it, can grow to accommodate a much
Speaker 4: higher volume of transactions. And whenever banks take on more liabilities,
Speaker 4: which is the same as taking in deposits, the risk
Speaker 4: of a run grows. And so this is where people
Speaker 4: become very acutely aware of the risk that leve talked
Speaker 4: about it, which is in the US, if you have
Speaker 4: liquidity problems, you can go to the FED. In Europe,
Speaker 4: if you have dollar liquidity problems, there's nowhere to go.
Speaker 3: The goal here is not to get US financial activity
Speaker 3: offshore for its own sake. The goal is very much
Speaker 3: to stop holders of dollars, especially foreign central banks, from
Speaker 3: going to the gold window at the US Treasury and
Speaker 3: draining our increasingly shrinking gold reserves. And so this is
Speaker 3: a sort of a two step move. We're going to
Speaker 3: have new investment opportunities so that you don't want to
Speaker 3: go and withdraw the gold, so that you hold your
Speaker 3: dollar balances offshore. We're going to build up this market.
Speaker 3: It's going to be what they call the outer defenses
Speaker 3: of essentially the Breton Woods International Monetary System.
Speaker 4: It's basically a SPRUL advocates and this report it's all
Speaker 4: about confidence, right, so we don't actually need to provide
Speaker 4: anything other than assurances that someone's going to have their back,
Speaker 4: because this is always a concern when the your dollar
Speaker 4: market was growing, is that you know who's going to
Speaker 4: solve the problem of liquidity if everyone goes to their
Speaker 4: eurobank at the same time. And so what Dylan and
Speaker 4: Russa come up with is the swap lines. Now, the
Speaker 4: swap lines are initially from the Exchange Stabilization Fund, which
Speaker 4: created in the thirties just intervene in foreign exchange markets.
Speaker 4: So it allows the US government to buy foreign currency.
Speaker 4: Buying foreign currency is the same as giving other people dollars, right,
Speaker 4: you're just saying I need something in return. It might
Speaker 4: as well be Stirling or Franks or something like that. Now,
Speaker 4: the problem for Dylan Russa is the ESF is what's
Speaker 4: called the funded vehicle, meaning it only has so much money,
Speaker 4: and by the early sixties they've made a bunch of
Speaker 4: commitments to Latin American countries that basically mean there's no
Speaker 4: gunpowder left and the resources they have at their disposals
Speaker 4: through the ESF, which is controlled by the Treasury, are minimal.
Speaker 4: But guess who has essentially infinite resources when it comes
Speaker 4: to printing money is the central bank. And so they
Speaker 4: want to be able to intervene in foreign exchange markets,
Speaker 4: which is a different word for lending dollars to foreign
Speaker 4: central banks that could then lend them to Euro dollar issues.
Speaker 4: And so if a eurobank comes into trouble, which they
Speaker 4: will do with some frequency throughout the sixties, they go
Speaker 4: to their central bank and say I need dollars. That
Speaker 4: central bank goes to the FED in this case and
Speaker 4: say I need dollars and so you can lend those
Speaker 4: dollars that effectively backstop non US banks. So they do
Speaker 4: it through swap transaction. But that's just the way they
Speaker 4: structure it. The question is is the FED comfortable with
Speaker 4: this because they had done some foreign exchange transactions in
Speaker 4: the past, but it wasn't really a core part of
Speaker 4: what they did previously, and they didn't have a standing
Speaker 4: authorization to do what are called open market operations and
Speaker 4: foreign currencies. So these swaps are a new kind of
Speaker 4: open market operation that the committee, the FMC, the Federal
Speaker 4: Open Market Committee, needs to decide is legal, authorized, is
Speaker 4: within their mandate, is something they're comfortable with from the
Speaker 4: policy perspective. And Bill Martin is the chair of the FED.
Speaker 4: He's been the chair for a while at this point.
Speaker 4: He's actually the Treasury negotiator for the Federal Reserve Treasury
Speaker 4: Accord that deepegs the bond market after the Second World War,
Speaker 4: so he's he's been around DC a lot. He's a
Speaker 4: very well known character. He's a very powerful chairman, and
Speaker 4: he is sort of, at least based on some of
Speaker 4: the oral interviews that are done later with Bob Bruce
Speaker 4: among others, pretty uncomfortable with this idea, and it's pretty
Speaker 4: controversial across the committee. Now they don't reject it outright,
Speaker 4: but they are wary. But Kennedy and Dylan and russ
Speaker 4: are pretty adamant that this sort of has to happen,
Speaker 4: and they put a lot of pressure on Martin, and
Speaker 4: eventually they offer Treasures General Counsel to author an opinion
Speaker 4: saying this is legally authorized. And then they get Bobby Kennedy,
Speaker 4: which the FED didn't ask for it, to write an
Speaker 4: opinion saying this is legally authorized, so they can have
Speaker 4: something in their back pocket when Congress asks questions, and
Speaker 4: Congress does ask questions pretty quickly. In one of his
Speaker 4: oral history interviews, Russa remembers the debate and the fed's concerns,
Speaker 4: in particular getting.
Speaker 9: The swap started. There were two problems.
Speaker 8: Of course, other countries were suspicious of that too, didn't
Speaker 8: know quite what we had in mind.
Speaker 9: And incidentally, I.
Speaker 8: Had to research the existing legislation very carefully, but I
Speaker 8: discovered that we didn't need laws. I could go ahead
Speaker 8: and do it under president legislation. I had to get
Speaker 8: a ruling in the General Council. The Fell Reserve was
Speaker 8: very suspicious and reluctant. It's a big body, people from
Speaker 8: all over the country, and you can't sit down and
Speaker 8: explain it all to them all at once and expected
Speaker 8: to go across. So I figured, and Dylan certain agreed
Speaker 8: with this.
Speaker 9: What we had to do was prove it to him.
Speaker 8: What we had to do there with the FED was
Speaker 8: was get going by having the New York Fed through Coombs,
Speaker 8: arrange a swap line with this bank or.
Speaker 9: That central bank using Treasury money.
Speaker 8: The Treasury didn't have very much money, and the Stabilization
Speaker 8: Fund at that time and free money, we had less
Speaker 8: than three hundred million dollars. But I did a little
Speaker 8: bit of double counting. I'd make a deal with Germany
Speaker 8: for one hundred minion, and France for fifty, England for
Speaker 8: fifty million, and maybe added up to four or five
Speaker 8: hundred million, always assuming I never have.
Speaker 9: To use them all at once.
Speaker 8: I got up to a million by the end of
Speaker 8: the first year, and we had used it a little
Speaker 8: by that time, not for the US but for the British,
Speaker 8: and it had proved itself enough so that we could
Speaker 8: then go to the Federal Reserve and say, look, this
Speaker 8: is a perfectly workable arrangement.
Speaker 9: These are short term.
Speaker 8: You get the deposit of another currency when we pay
Speaker 8: out ours.
Speaker 9: This is ideal for the central bank to do.
Speaker 3: And you can see why they're worried about this. Right
Speaker 3: in the nineteen thirties, Congress sets up the Exchange Stabilization
Speaker 3: Fund and puts it in the Treasury Department, limits its
Speaker 3: funding and says this is the way the US government
Speaker 3: is going to manage exchange fluctuation of the dollar against
Speaker 3: other currencies. And now we have the Treasury going to
Speaker 3: the FED and saying we don't have enough gunpowder. Can
Speaker 3: you do it for us? So the FED might think, well,
Speaker 3: go to Congress and get more appropriation. You're kind of
Speaker 3: putting us in a tight spot here. This is just
Speaker 3: sort of also stage one, which is the foreign exchange
Speaker 3: swap lines. There becomes an additional pressure point for the FED,
Speaker 3: which is the swap lines that are also set up
Speaker 3: in parallel to support euro dollar issue ince overseas. So
Speaker 3: the sort of conventional swap lines the sort of standard
Speaker 3: account of this period. When the swap lines are set up,
Speaker 3: it's all focused on replacing the ESF to intervene in
Speaker 3: foreign exchange markets. But they set up these parallel swap
Speaker 3: lines that are about lending dollars to foreign central banks.
Speaker 3: And there you have the FED also in a spot
Speaker 3: because the Federal Reserve Act was not set up with
Speaker 3: the idea in mind that the Federal Reserve would be
Speaker 3: essentially facilitated the backstopping of euro dollar issuers in overseas markets.
Speaker 3: But the Treasury is gung ho, and this is existential
Speaker 3: for the administration because they have tied themselves to the
Speaker 3: mass of the thirty five dollars peg, and they are
Speaker 3: afraid of both the political end financial consequences of showing
Speaker 3: any weakness. And so just even to have the Treasure
Speaker 3: Secretary go to Congress and say we don't have enough
Speaker 3: resources in the ESF, they would be afraid about the
Speaker 3: lack of confidence that that might signal to the market
Speaker 3: about the American ability to keep to the thirty five dollars.
Speaker 4: So they get the approval eventually with the backing of
Speaker 4: the Treasure General Counsel and Bobby Kennedy and everyone kind
Speaker 4: of gets together and the committee approves, and so now
Speaker 4: they have swap lines and they need someone to run
Speaker 4: them and so this is where we meet kind of
Speaker 4: the third character here, this guy Charlie Cooms. It's kind
Speaker 4: of the true believer. You can I think of Douglas
Speaker 4: Dylan as kind of the operator. He's like em in
Speaker 4: the James Bond canon. You could think of Barb Russ
Speaker 4: as Q, right, he's coming up with all the ideas
Speaker 4: with the different gadgets they can use. But Double O
Speaker 4: seven is Charlie Coombs franchise. Shot was his liaison with
Speaker 4: the Treasury in those early years, and he remembers Coombs
Speaker 4: as a quote unquote CIA type operator.
Speaker 5: Well, he was a pretty complex personality, but underneath it all,
Speaker 5: he was a CIA type operator. He was a discrete
Speaker 5: spy over head in the national interest of the United States,
Speaker 5: which he thought he knew exactly what it was at heart,
Speaker 5: and he was willing to do with anything in order
Speaker 5: to achieve those objective. He was a tool operator.
Speaker 4: And now we don't know this for sure, but he
Speaker 4: was actually counter intelligence during the Second World War. He
Speaker 4: ends up in Greece in nineteen forty seven, right after
Speaker 4: the Civil War starts. That's the origins of containment. It's
Speaker 4: the first CIA hot zone they called it. And then
Speaker 4: he comes back to New York as a PhD economist
Speaker 4: and gets Bob Rus's old job. Actually he was Ruth's deputy,
Speaker 4: and then he gets Ruth's job, and then he's selected
Speaker 4: as the Special Manager for Foreign Exchange in nineteen sixty two.
Speaker 4: Now the system open market account Manager manages the bond portfolio,
Speaker 4: still does, but they create a new position that's very
Speaker 4: senior in the organization called a Special Manager for Foreign Exchange,
Speaker 4: and his job is to negotiate and operate the swap lines.
Speaker 4: And the understanding seems to have been that the Treasury
Speaker 4: would call the shots. They're what one of their former officers,
Speaker 4: who was actually the gopher between the Treasury and the FED,
Speaker 4: described as the Treasury having political authority and the FED
Speaker 4: having technical authority, Meaning the Treasury is ultimately calling the
Speaker 4: shots for who gets what when, and the FED goes
Speaker 4: out and makes that happen. Now, we just know that
Speaker 4: from one oral interview, so like what actually happened on
Speaker 4: a day to day basis is harder to say, but
Speaker 4: it was generally acknowledged. And Rusa represents to Kennedy the
Speaker 4: fact that Treasury is sort of in charge of international
Speaker 4: relations in a financial context, and so Charlie runs around
Speaker 4: Europe setting up swap lines, art with London and Paris
Speaker 4: and the usual places. He also ends up in Basle, Switzerland. Basil,
Speaker 4: Switzerland is the headquarters of the Bank for National Settlements,
Speaker 4: which is an old institution. It comes from I think
Speaker 4: nineteen thirty one. It's founded and it's essentially a bank
Speaker 4: to central banks. So it's a convening point for central
Speaker 4: bank still is. It's a very important institution. They have
Speaker 4: their own banking services today and in the nineteen sixties.
Speaker 4: And so he sets up a secret swap line with
Speaker 4: the Bank for the National Settlements that is in currencies
Speaker 4: other than Swiss Franks, despite the fact that they're in Switzerland,
Speaker 4: and the explicit purpose of that, which recent research has
Speaker 4: sort of revealed through archival stuff, is to support the
Speaker 4: ear dollar market, and they do that in Switzerland. They
Speaker 4: do it around ur ends sort of seasonal stringency. They
Speaker 4: provide liquidity to the ear dollar market. So they're actively
Speaker 4: supporting the stability of eurobanks. As soon as these swap
Speaker 4: lines are in place, they're they're relatively active use and
Speaker 4: so now you have this reciprocal credit agreement network. That's
Speaker 4: what they call it. They didn't call them swap lines
Speaker 4: at the time. Kennedy tells Congress about this in his
Speaker 4: Bounce a payments message, and he's like very proud of
Speaker 4: this is like one of the clever effective backstops of
Speaker 4: the global dollar system, because now the US can use
Speaker 4: the firepower of its central bank to keep the dollars
Speaker 4: stable and strong internationally.
Speaker 5: But as they started out, Oosa, who by then was
Speaker 5: a federal government official, was asserting the supremacy of the
Speaker 5: political arm, and Holmes was advertise and William Chetney Watten,
Speaker 5: we're trying to assert the supremacy of the technical arm
Speaker 5: to carry out the technical OPVOI, you know what I mean.
Speaker 5: Combs and his associates, we're trying to make us look
Speaker 5: like you have to be really good for an exchange
Speaker 5: man and know the markets in order to know what
Speaker 5: you're doing. And an Osa and Diven we're saying, including
Speaker 5: on foreign policy, and we know best what to do.
Speaker 4: You know, this is the point where the system can
Speaker 4: really grow. So euro dollars now have implicit backing from
Speaker 4: the Federal Reserve, or at least by arm's length through
Speaker 4: the BIS. They have a source of liquidity in dollars,
Speaker 4: and so they grow rapidly. And the interestiqualization tax, which
Speaker 4: is the mechanism by which they pushed some of this
Speaker 4: financial activity offshore, provides yet another use case. Eurobonds are issued,
Speaker 4: which is just dollar denominated bonds listed in Europe funded
Speaker 4: with Euro dollars. The proceeds of those raises go into
Speaker 4: eurodo system, and everything's kind of set up for a
Speaker 4: virtuous cycle. And by the end of the decade, it's
Speaker 4: a massive market.
Speaker 3: You go from like half a tether to a Bank
Speaker 3: of America.
Speaker 4: Yeah, in nineteen seventy it's a seventy billion dollar market.
Speaker 4: If you size that to the US economy, it's about
Speaker 4: one point eight trillion dollars in today's standards. So it's
Speaker 4: a very big market by the end of the decade,
Speaker 4: and it's starting to be more trouble than it's worth.
Speaker 4: So there have been warnings along the way this thing
Speaker 4: might be a problem. It's funding speculation, potentially against the dollar.
Speaker 4: It's somewhat unstable. Regulations are not uniform. There are some
Speaker 4: attempts to control it, but the US kind of juices
Speaker 4: is a bit by regulation Q is adjusted in a
Speaker 4: way that facilitates ear a Dollar's no other reasons for
Speaker 4: that that made sense domestically, But they're willing to let
Speaker 4: the year dollar market grow. They don't really put reserve
Speaker 4: requirements on it. And actually Martin is quite resistant even
Speaker 4: to putting reserve requirements on US bank branches that are
Speaker 4: raising year dollars. He tends not to bring the issue
Speaker 4: up in meetings. And now you have this, let's call
Speaker 4: it one point eight trillion in today's terms, growing twenty
Speaker 4: five percent a year, and people are starting to get worried,
Speaker 4: like really worried. And the French foreign minister who coined
Speaker 4: the term exorbitan privilege calls it a hydra headed monster.
Speaker 4: This is now people are getting worried that the system
Speaker 4: is going to eat itself. So this is such a
Speaker 4: successful solution to the immediate problem of offshoring US financial
Speaker 4: activity that by the en the end of the decade,
Speaker 4: you have continued gold outflows funded in part by speculation
Speaker 4: through the euro dollar market, and rapid movements of capital
Speaker 4: between different places, searching for either safety or higher interest
Speaker 4: rates or both. And so the whole system is getting
Speaker 4: very unstable because at some point one of these two
Speaker 4: things has to give. Either Euro dollars have to be
Speaker 4: controlled or this system has to get completely reworked. And
Speaker 4: it's unclear in the early seventies which of these two
Speaker 4: forces is going to prevail.
Speaker 2: Dunk dunt, dunh What a cliffhanger. Okay, that was the
Speaker 2: second episode of our special three part series examining the
Speaker 2: origins of euro dollars. So by the end of the
Speaker 2: nineteen sixties, this market has grown from essentially nothing to
Speaker 2: about seventy billion dollars, and that growth has been essential
Speaker 2: to maintaining the breton Wood system. But the question is
Speaker 2: at what cost?
Speaker 3: Time?
Speaker 1: Ye I'm things you're about to get a little crazy
Speaker 1: as we head into the nineteen seventies and beyond, just
Speaker 1: sort of a wild decade I think for monetary policy.
Speaker 1: Nixon famously shaking up the entire post war monetary system.
Speaker 1: People love to talk about the Nixon gold shock, like
Speaker 1: what happened in nineteen seventy one, all these great wild
Speaker 1: charts they're always floating around on gold and crypto Twitter.
Speaker 1: But if I'm being on this, I have very little
Speaker 1: understanding of what that actually was, why he did it,
Speaker 1: what it meant, why it was done, and so forth.
Speaker 1: So I'm looking forward to finding out.
Speaker 2: Yeah, there's the gold shock, and there's an oil shock,
Speaker 2: and there's also a kind of financial shock in the
Speaker 2: form of a somewhat mysterious bank collapse. And we hope
Speaker 2: you'll join us for the third installment in our ongoing
Speaker 2: series in which Josh Younger and levmnand continue the story
Speaker 2: of euro dollars. But in the meantime, this has been
Speaker 2: another episode of the Authoughts podcast. I'm Tracy Alloway. You
Speaker 2: can follow me at Tracy Alloway.
Speaker 1: I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow one of our special guests, levmanand he's at levmanand
Speaker 1: our other special guest, Josh Younger he's not on Twitter.
Speaker 1: Thanks to our producers Kerman Rodriguez at krbin ermann dash
Speaker 1: Ol Bennett at Dashbot and Kilbrooks at Kilbrooks. And special
Speaker 1: thanks to our sound engineer Blake Maples. From our Oddlots content,
Speaker 1: go to bloomberg dot com slash odd lots, where we
Speaker 1: have transcripts, a blog, and a daily newsletter and you
Speaker 1: can chat about all of these topics twenty four to
Speaker 1: seven in our discord Discord dot gg slash.
Speaker 2: Odd Lots and if you enjoy Odd Lots, If you
Speaker 2: like it when we bring you the hidden history of
Speaker 2: euro dollars, then please leave us a positive review on
Speaker 2: your favorite podcast platform. And remember, if you are a
Speaker 2: Bloomberg subscriber, you can listen to all of our episodes
Speaker 2: absolutely ad free. All you need to do is find
Speaker 2: the Bloomberg channel on Apple Podcasts and follow the instructions there.
Speaker 2: Thanks for listening in